Luxury goods are among the most visible indicators of societies with rapidly growing levels of disposable income. China is no exception and a stroll through the high streets of even second or third tier Chinese cities proves this very quickly. Big name foreign luxury brands like Gucci and Burberry now have literally dozens of outlets across the country, from Beijing and Shanghai to Wuxi, Kunming and Chengdu.

The luxury goods market in China barely noticed the global financial crisis and recession. Figures from the World Luxury Association (WLA) show Chinese consumers spent US$9.4bn on luxury goods in 2009, nudging out Japan to make it the world’s second largest luxury goods market after the US.

And that’s just counting what was spent within the national borders. China mainlanders spend significantly more on luxury when they travel to places like Hong Kong and Europe. Travelling Chinese spend $11.6bn on luxury goods in 2008, compared with $8.6bn at home in the same year.

As disposable incomes continue to rise, the growth potential for the market is clearly enormous. McKinsey has estimated the number of ‘wealthy households’ -- with annual income over RMB250,000 ($36,000) -- is growing at 16% per annum and will reach four million by 2015.

Unlike many other goods markets in China, the overwhelming demand in luxury is for foreign brands. The top ten luxury brands in the market in 2008 were Louis Vuitton, Gucci, Chanel, Versace, Dior, Prada, Armani, Salvatore Ferragamo, Fendi and Hermes, according to the WLA.

The expansion of brands into second and third tier cities is well and truly underway and this is where the real growth opportunities for supply chain and logistics companies lie. A late 2009 report from Bain Company that estimated full year growth in the China luxury goods market of 12% said growth in inland regions would possibly be as high as 35%. Brands such as Louis Vuitton, Salvatore Ferragamo, Gucci and Gieves & Hawkes already have outlets in many non-first tier cities, including Ningbo, Suzhou, Shenyang, Chengdu, Qingdao and Changchun.

Foreign luxury brands have in the past tended to enter China with a local distribution partner. This is changing. The trend at the moment is for brands to enter the market on their own steam. Taken together with increased competition in the sector as most brands rapidly expand their distribution channels, this means we will see more of the supply chain and logistics processes that characterise the industry in other markets coming into the China luxury goods market

This is good news for the development of the supply chain and logistics sector as a whole, and particularly for foreign service providers looking to find ways to compete on quality over price. On a global level, luxury brands tend to compete with one another through a combination of design leadership and speed to market. This makes it an industry that generally looks for premium supply chain services that are flexible, reliable and fast.

As a driver of supply chain efficiency in China, the luxury goods market is one to watch.

Turloch Mooney
Managing Editor, Supply Chain Asia